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Tax Advice for Specific Needs
The US tax code is one of the most complex in the world—and it can be especially confusing for Americans who often travel or live abroad. To bring some clarity to this complicated topic, let’s take a look at the basics of digital nomad taxes.
Yes, American digital nomads are required to file a US Federal Tax Return if they make over the minimum filing requirement—no matter where they live and if they’re working remotely.
The US is one of the few countries in the world that uses a citizenship-based tax system. That means that the requirement to file US taxes depends on your citizenship status, not your residence. So even if you live in another country, as long as you’re a US citizen, you must file US taxes.
But even though you’re required to file, you may not actually owe any taxes as a digital nomad. This will depend on a variety of factors, such as your income. There are handy tax exclusions and deductions that some digital nomads can use to eliminate their US tax bill entirely (more on that later).
Whether digital nomads have to file or pay state taxes will depend on the state where they last resided and how recently they left. Typically, you would only need to file a State Tax Return if you lived in that state for a certain amount of time during the tax year or earned income there.
However, some states are notorious for trying to maintain tax jurisdiction over their former residents. These states include:
If you moved out of these states, they may impose state taxes on you if:
Because of these complications, some digital nomads who originated from these states will temporarily establish residence in another, less difficult state before traveling abroad. Once you’ve left the country, it can be very hard—or even impossible—to erase your attachment to a state like California or Virginia from overseas.
If you do opt for that strategy, remember that some states don’t tax income at all, such as:
Regardless, be sure to check out the specific rules in place for your state when determining whether you should file state taxes as a digital nomad.
Many digital nomads are self-employed. When this is the case, they will be liable for the US self-employment tax. This tax includes:
…coming to a grand total of 15.3% of your income. And unfortunately, the self-employment tax cannot be excluded through the Foreign Earned Income Exclusion (FEIE) or Foreign Tax Credit. (More on both of those below.)
However, some countries have International Social Security agreements (“Totalization Agreements”) with the US. If you live in one of these countries, you may be exempt from the self-employment tax and only subject to the Social Security tax for the foreign country you live in.
To learn more about how a Totalization Agreement may impact your digital nomad taxes, see here:
Understanding Tax Treaties and Totalization Agreements While Living Abroad
As stated above, digital nomads must file a US Federal Tax Return even if they live in a foreign country. But do you have to pay taxes to the government of that foreign country?
That will depend on the tax policies in place in whatever country you’re living in. While the US has a citizenship-based tax system, most countries have residence-based or territorial systems.
Residence-based taxation is the most common tax system in the world, with over 130 countries using it, including:
Territorial taxation is less common, but still used in quite a few countries, such as:
For more information on foreign taxes for digital nomads, see here:
Foreign Taxes for Digital Nomads: When to Pay
For digital nomads living abroad, there can be significant tax exclusions available. The biggest three are the:
Let’s go over each.
The FEIE is a tax benefit that lets expats and digital nomads exclude a certain amount of foreign-earned income from US taxation. The exact number changes from year to year, but for income earned in 2022 the exclusions is $112,000 and for income earned in 2023 the exclusion has increased to $120,000.
The FEIE applies only to earned income, including:
…and not to unearned income, such as:
The FEIE isn’t an automatic exclusion for anyone living outside of the US, either. To qualify for the FEIE, you must pass at least one of two tests:
(We’ll go over both of those in more detail in a little bit.)
Use our simple excel calculator to get an estimate of how the foreign earned income exclusion will save you money. It will make your day!
The Foreign Housing Exclusion lets Americans living abroad deduct certain housing expenses from their US taxes. This exclusion can only be claimed in addition to the FEIE, meaning you must first qualify for and claim the FEIE to be eligible.
There are a few other requirements as well:
Once you qualify, you can exclude up to 14% of the amount of your FEIE. For example, during the 2022 tax year, the maximum exclusion was $112,000, making the maximum Foreign Housing Exclusion $15,680. For 2023, the maximum exclusion will increase to $120,000, and the Foreign Housing Exclusion will increase to $16,800.
To learn more about whether you qualify for the Foreign Housing Exclusion, see here:
What Is the Foreign Housing Exclusion? A Guide for Expats
If you pay income taxes to the foreign country in which you reside, you can generally deduct those tax payments from your US tax bill using the Foreign Tax Credit. This is designed to keep expats and digital nomads from being taxed twice on the same income.
However, you can’t deduct any income that you’ve already excluded using the FEIE. Not all foreign taxes will apply, either. To qualify for a Foreign Tax Credit deduction, you must have a foreign tax liability that:
For a deeper dive into the nuances of the Foreign Tax Credit, give this post a read:
Form 1116: How to Claim the Foreign Tax Credit
To qualify for the FEIE—and by extension, the Foreign Housing Exclusion—digital nomads must pass either the physical presence test or the bona fide residence test. So how exactly do those tests work?
We’ll start with the physical presence test, since it’s the easiest one for digital nomads to pass.
All that the physical presence test requires is that you spend more than 330 full days outside of the US during any 12-month period. You can spend those 330 days in a single foreign country or several—though you must be in the country legally.
The bona fide residence test is more complicated than the physical presence test and much less likely for digital nomads to pass. The bona fide residence test requires that you:
As you can see, the bona fide residence test requires that you occupy a single foreign country for at least one entire tax year. While an expat may meet these standards, digital nomads rarely do.
For more information on the bona fide resident test, see our guide here:
What Is the Bona Fide Residence Test? Key Facts to Know
The tax forms that digital nomads must file can vary widely depending on their circumstances. In some cases, trying to keep track of what you are and aren’t required to file can feel overwhelming.
To help simplify things, here are some of the most common tax forms for digital nomads.
IRS Form 1040 is your personal tax return. Virtually all US citizens—including digital nomads—must file this form.
The due date to file Form 1040 is generally April 15 of each year, though you can apply for an extension in certain situations.
If you need more time to file your digital nomad tax return, you can request an additional filing extension to October 15. In extreme cases, you can even request an extension to December 15.
To claim the FEIE and Foreign Housing Exclusion, you must complete Form 2555 and attach it to your Form 1040.
Because this form is always submitted with Form 1040, it has the same due date: April 15.
A simplified version of this form, 2555-EZ, is available for certain digital nomads. To use the simplified form, you must:
Form 1116 is used to claim the Foreign Tax Credit. Like Form 2555, this form must be attached to your Form 1040 and submitted at the same time.
Any US person—including digital nomads—with more than a combined $10,000 in foreign bank accounts is required to file an FBAR.
This form is filed separately from your Form 1040, but does have the same standard due date: April 15. (However, if you miss that deadline, there’s an automatic extension to October 15.)
Either way, this form must be filed online and sent directly to the Financial Crimes Enforcement Network (FinCEN), not the IRS.
If an expat, digital nomad, or other US person living abroad owns foreign assets worth more than a certain threshold, they must file Form 8938.
However, the thresholds are much lower for digital nomads not considered to be living abroad. In that case, the thresholds are reduced to a quarter of the amounts listed above.
(Please note that the standard for “living abroad” is the same as the qualifications for the FEIE. If you are unable to pass the physical presence test or bona fide residence test, the IRS will apply the reduced thresholds for Form 8938, even if you currently reside outside of the US.)
This form is filed with your Form 1040, and has the same due date.
Hopefully, after reading this guide, you have a better understanding of how digital nomads are taxed.
But if you still have questions, you’re far from alone. Digital nomad taxes are nothing if not complicated. There are mountains of details to juggle, with countless nuances and qualifications for each. It’s easy to get a little lost.